Question

The Mega-Bank is considering either a bankwide overhead rate or department overhead rates to allocate $135,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:
Department DLH Loans Processed Direct Costs
Consumer 16,000 650 $350,000
Commercial 7,000 400 $250,000

Banc Corp. Trust estimates that it costs $500 to analyze and close a commercial loan. This amount has been included in the $410,000 of indirect costs. How much of the $410,000 indirect costs should be allocated to the Commercial Department?

Answer 1

Answer:

The Mega-Bank

The amount allocated to the Commercial Department is:

= $324,810.

Explanation:

a) Data and Calculations:

Indirect costs = $410,000

Department     DLH    Loans Processed     Direct Costs

Consumer     16,000            650                   $350,000

Commercial    7,000            400                   $250,000

Total             23,000          1,050                   $600,000

Allocation Bases:

Bankwide rates:

DLH = $410,000/23,000 = $17.83

Loans processed = $410,000/1,050 = $390.48

Commercial Department Allocated Costs:

Cost to process loans = $500 * 400 = $200,000

Cost based on DLH = $17.83 * 7,000 =     124,810

Total costs =                                            $324,810